9 Facts You Should Know Regarding Credit and Student Loans

By Phil Tirone

What’s the relationship between student loans and credit scores? You may be surprised! In the following paragraphs, we take a look at the nine things you ought to know about student loans so that you can build a great credit score. First a bit of background. Student loans are unsecured loans (without collateral backing them) issued with the costs of tuition, books, board, as well as other school-related expenses. As with every other loan, your credit score is deeply impacted by your student loan. If you make your student loan payments in time, your credit score will improve. If your payments are late or should you skip a payment, your score will drop. Student loans are a good way for young adults to start the all-important task of showing lenders that they can handle debt. If lenders see that you can make payments promptly as well as in full, your credit score will go up and you will be very likely to get larger loans down the road.This is very important as you will need credit after graduating from college. Your first employer might do a credit check, assuming that your credit score is an effective indication of whether you are responsible or not. A new landlord will surely run your credit before renting a house to you. With all this in your mind, allow me to share nine things you ought to know about student loans and credit. Student Loans and Credit, Fact #1: If you apply for a student loan, your credit may or may not be pulled. Some lenders do require a credit score, but others do not. If your credit score is pulled, a credit inquiry will be added to your credit report. This may cause your score to decrease, though the impact will be minimal. Student Loans and Credit, Fact #2: About 30 percent of your credit score is dependent upon your outstanding debt: the ratio of the amount you owe versus the amount you have paid. The more you have paid and the less you owe, the greater your score. If your payments are now being deferred til you have graduated, or if you have deferred payments for another reason, the ratio isn’t going to be in your favor, and your score might drop. Nevertheless, it will eventually start to increase after about 6 months of making payments in time. Student Loans and Credit, Fact #3: With this in mind, consider that students that happen to be positioned to pay back their loans prior to graduating will enjoy a quicker journey to good credit. Although many student loans do not require repayment until you have graduated, your credit score could be higher if you start paying back the loans immediately. Remember that some employers will run a credit check when you apply for your first post-college job, so developing a high credit score could behoove you.Some have theorized that if individuals repay their student loans too quickly, they can lose credit points (presumably because the maximum interest on the loan isn’t going to be accrued if the loan is paid off early). It is my opinion that this is a bogus claim. The precise information on the credit-scoring formula have not been released, and so i cannot undoubtedly confirm this theory one way or another, but I seriously doubt its accuracy. Credit-scoring bureaus are not interested with your creditor’s ability to earn the most interest, but rather with your ability to repay your loan on time. The bureaus wish to know you will pay your debts on time. Paying your student loans sooner rather than later is a smart move to make because your debt-to-principal ratio will drop and your score should increase. Student Loans and Credit, Fact #4: Prior to leaving college, explore the chance to be given exit counseling, something most colleges offer to prepare their students to repay federal student loans. This counseling can provide you helpful information about your rights and responsibilities and the conditions and terms of your loans. Student Loans and Credit, Fact #5: Once you begin repaying the loan, never miss a payment. Here’s something you might not know about student loans and credit: 35 % of your total credit score will be drawn from your payment history on credit cards and loans. Student Loans and Credit, Fact #6: If you can’t come up with a payment, ask for a forbearance, a short-term agreement that allows you to make smaller payments, or no payments at all. Otherwise, you will harm your credit score. Keep in mind that if you do not make payments, interest will continue to accrue and the amount due will grow larger. Student Loans and Credit, Fact #7: Keep in touch with your lender. If you are struggling with your payments, never hold off until the lender approaches you or until a delinquency notice is logged on your record. Instead, initiate communication with your lender. Discuss forbearance or student loan consolidation. Student Loans and Credit, Fact #8: Student loans can’t be dismissed during bankruptcy. Student Loans and Credit, Fact #9: Making regular payments on your student loans is an effective opportunity for young adults to get started developing their credit score, setting the cornerstone for better loan terms and lower interest rates on future loans, and saving bundles over the course of a lifetime. But this isn’t enough. As you proceed after school, you should try to incorporate different types of credit into your finances while keeping current on your payments. The mix of credit you’ve got comprises 10 percent of your score. The credit scoring bureaus want to see that you can handle an assortment of types of loans-from credit cards to student loans to car loans. Now that you are aware of the nine important facts about student loans and credit, be sure you educate yourself on the 38 facts the banks don’t want you to know! These money-saving tips and close-guarded strategies about credit scores will save you a lot of money and help you position yourself for success. Learn more about how to fix bad credit and create a high credit score at Phil’s site dedicated to giving the facts about credit scoring and personal finance.

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